Bureau Veritas SA

PAR:BVI

Earnings Call Analysis

Strong Sales Pipeline and Steady Margins Outlook

Executives shared optimism about current sales pipelines and their focus on high-demand services. With sales meeting or exceeding budget, there are no significant concerns. Margins are partially down due to a softer margin in one segment and a one-off last year but are expected to increase in productivity, especially in industry segments relating to renewables, power, and OpEx businesses. Steady margins are expected in H2, reiterating guidance to sustain margins comparable to last year at constant currency. Despite experiencing delayed decisions, primarily in transactional business due to interest rates, resilience is strong across business, with no substantial negative impacts seen. Additionally, new U.S. policies like the Inflation Reduction Act are likely to boost growth in the medium term. Finally, the focus shifts towards incremental earnings per share (EPS) as a value creation marker for shareholders.

Robust Growth and Upward Revision in Topline Outlook

Bureau Veritas has experienced a strong first half of the year, with revenue reaching €2.9 billion, marking a year-on-year increase of 7.8% and 10.9% at constant currency. Organic growth has been solid at 9.4%, spurred on by various sectors within the company's varied business mix and global geographical reach. Notably, their Marine & Offshore, Industry, Building & Infrastructure, Certification, and Agri-Food and Commodities sectors sustained strong growth momentum.

Improved Profitability and Lean Operations

Adjusted operating profit saw a healthy uptick of 5.7% compared to the previous year, amounting to €434 million, contributing to a robust margin of 15%. In line with these improvements, Bureau Veritas also managed to reduce their working capital by 100 basis points and maintained an admirable leverage ratio at 0.95, showcasing effective working capital control.

Commitment to Sustainability and Ethical Practices

Bureau Veritas is aligning with contemporary business values by focusing on decarbonization goals and improving their compliance and code of ethics. The greenhouse gas emissions targets have been validated by the SBTi, marking a significant step in their journey to reduce emissions by 20% by 2025.

A Slight Currency Headwind

Foreign exchange movements unfavorably impacted performance due to the strength of the euro against other currencies, with a particularly notable effect from a weaker dollar in the second quarter. As a result, there was a negative impact of 3.1%. However, Bureau Veritas continues to actively manage its portfolio, which included the sale of a non-core automotive inspection business in the United States.

Consistent Cash Flow and Smart Financial Management

The company's free cash flow remained strong at €131.9 million, showing an improvement year-on-year. The leverage ratio continues to be effectively managed, staying largely unchanged from the end of 2022, and the debt structure is secure with no major refinancing due before 2025, and 100% of the debt is at fixed interest rates.

Robust Earnings and Positive Outlook

Adjusted EPS was reported at €0.61, up 11.1% from the previous year, reflecting strong operational performance and financial prudence. Capital expenditures have slightly increased to 2.6% of revenue, mainly to fund growth in lab-related businesses, indicating a commitment to long-term development.

Sector-Specific Successes: Marine & Offshore Excellence

The Marine & Offshore sector has been a standout performer, with a very strong organic revenue growth of 15.6%, buoyed by an increase in the fleet and double-digit growth in new construction and in-service activities. The outlook remains positive with a solid order book providing a strong basis for future growth.

Favorable Prospects with a Green Focus

Bureau Veritas' Green Line of solutions and services, which represents 55% of the last 12 months' sales, indicates that the company's sustainability solutions are in high demand and align with an increasingly eco-conscious market.

Bright Horizon in a Promising Market

With expectations to deliver mid- to high single-digit organic revenue growth, Bureau Veritas is poised to capitalize on the TIC market's promising future through strategic investments and tapping into growth opportunities.

Earnings Call Transcript 2023-Q2

[Operator]

Good day and welcome to Bureau Veritas Half Year 2023 Results Conference Call. My name is Priscilla, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]

I will now hand you over to your host, Hinda Gharbi, the Deputy CEO, to begin today's conference. Please go ahead. Thank you.

[Hinda Gharbi, Deputy CEO]

Thank you, Priscilla. Good morning, good afternoon and good evening to everyone. I'm pleased to welcome you to our results presentation the first time since becoming CEO on June 22. I'm joined by François Chabas, our group CFO. The group has delivered a strong set of results for H1 2023, and these are a great credit to the work of all our teams around the world.

I would like to thank my colleagues for this excellent performance. Before presenting our results, let me update you on the changes to the group's governance that followed the AGM in June. Laurent Mignon, Chairman of Wendel's, Managing Board was appointed Chairman of the Board of Directors following the retirement of our previous Chairman, Aldo Cardoso. In parallel, the Board committees were reorganized and are all shared by independent directors. As an Independent Director and Chairman of the Nomination and Compensation Committee, Pascal Lebard has been appointed Lead Independent Director and Vice-Chairman of the Board.

In addition, to support the execution of the group's CSR strategy, the Board created a CSR Committee shared by Mrs. Ana Giros Calpe. Mrs. Giros Calpe brings a long-standing operational experience around CSR matters. Her inputs will be valuable to the Board.

Finally, we're also pleased to welcome Geoffroy Roux de Bézieux to our Board of Directors as an independent director. Looking now at our financial highlights for the first half. Revenue in H1 was €2.9 billion, up 7.8% year-on-year and 10.9% at constant currency. The organic growth was 9.4%, showing an excellent underlying performance year-to-date. In the second quarter, we delivered double-digit organic growth of 10.3%.

This is a combination of strong volumes with the conversion of our healthy backlog and a pricing benefit as expected. Adjusted operating profit increased by 5.7% year-on-year to €434 million, generating a solid margin of 15%. Our adjusted net profit is up 11.1% to €276 million.

Free cash flow totaled €131.9 million, slightly up year-on-year, reflecting CapEx increase allocated to our lab businesses and demonstrates our excellent working capital control. The group's leverage ratio was further reduced to 0.95 from 1.1 last year. This excellent performance and our confidence in future trends allow us to revise upwards our topline growth outlook, while we expect stable margins at constant currency.

These results have once again been driven by our diversified business mix and Bureau Veritas' global geographical footprint. Looking at the mix this semester, Marine & Offshore, Industry, Building & Infrastructure, Certification and Agri-Food and Commodities continued their strong growth momentum in line with the previous quarters.

As expected, consumer products had a mixed first half as the contraction from reduced activity was moderated by the positive impact of our diversification strategy. From a geographical standpoint, the Americas, Africa and Middle East are leading the pack, while Asia's organic growth picked up sequentially. Before passing on to François for the financial review, I would like to share with you our progress in CSR performance so far this year.

In Health and Safety, we continue with our prevention programs where we further reduced our accident trade in the first half. On the gender diversity front, the proportion of women in leadership positions has increased to 29.7% in H1, and we are committed to our 35% target by 2025.

Staying true to our purpose and mission, we continue to enhance our compliance and code of ethics across all our operations through training and awareness programs. On decarbonization, we remain on track for our 20% reduction target by 2025. Year-to-date, our CO2 emissions per employee reduced by 3% compared to H1 2022.

Most importantly, our greenhouse gas emissions targets have been validated by the size-based target initiative, SBTi, as we committed to reduce absolute Scope 1 and to greenhouse gas emissions by 42% and to reduce absolute Scope 3 greenhouse gas emissions by 25%, both by 2030. I now hand over to François Chabas for the financial review.

[François Chabas, CFO]

Thank you, Hinda. Good morning, good afternoon to everyone.

Before looking in more detailed numbers, a few words on the key financial achievement of the first semester. Once again, we have proven our ability to deliver a strong and broad-based organic growth throughout the first half at 9.4%. On the profitability front, we delivered a margin of 15%, similar organically to last year.

When it comes to the bottom line, our adjusted EPS climbed 11.1%, led by solid operating and financial performance. On cash, finally, we continued to reduce working cap by 100 basis points. This has contributed to maintaining a leverage below one similar to the end of December '22. Looking at the revenue bridge now, we delivered €2.9 billion in the first half with an overall growth of 7.8% and significant organic growth of 9.4. It shows the strong momentum of our growth driver.

External growth contributed 1.5% on a net scope basis, reflecting the impact of the bolt-on acquisition realized in the past few quarters. As always, we continue to actively manage our portfolio. And in July, we sold our non-core automotive inspection business in the U.S., which for information represents less than €20 million of annualized revenue.

On the acquisition side, we continue to have some promising projects in the pipeline. When it comes to ForEx, we recorded a negative impact of 3.1%, which is mainly attributed to the strength of the euro against most currencies.

In the second quarter, we saw an additional impact due to a weaker dollar. At constant currency, our growth was 10.9% in the semester. When we look now at the overall performance of the group, this slide illustrates the broad-based growth we have enjoyed and demonstrate again the strength and mix of our portfolio.

Four businesses delivered a very strong organic growth, Marine & Offshore, up 15.6%; Industry up 15.5%; Certification, up 11.2%; and Building & Infrastructure, up 10.8%. Agri-Food & Commodities grew 6.5% organically led by all subsegments.

While Consumer Products Services contracted by 3.1% organically due to the slow consumer demand across developed economies. This was more than offset by new acquisitions, which added 6% of incremental revenue in the first semester of 2023.

As you can see, in the second quarter, the positive trend of Q1 continued and even accelerated in some businesses. Organic growth for the very strong 10.3% with double-digit organic revenue growth in four out of six activities. As you can see here, the M&A focus of the group remains on B&I and CPS divisions, reflecting recent acquisitions.

Now on the margin bridge on this slide, we delivered a 15% margin in the semester. The adjusted operating margin was resilient organically, and we are happy to report that despite inflationary pressures and the weak H1 for the CPS segment, we delivered a similar organic margin to last year. ForEx was a drag of around 20 bps to the group margins due to the strength of the euro against other currencies.

Within the portfolio now, the revenue growth and operating leverage drove organic margin higher in Marine & Offshore, up 113 basis points organically to reach 24.7%; Agri-Food & Commodities was up 66 basis points to 13.5%. In addition, our efforts to be more commercially selective by focusing on more profitable contracted industry as paid off.

The Industry division generated a 147 basis point organic improvement to reach 12.3. Elsewhere, our CPS margin remained robust at 20.4%. It reflects the efforts to protect the margin despite a lower level of revenue. Finally, B&I margin appears down to 12.2%, but was flat on a like-for-like basis. This is due to a positive one-off in H1 2022 regarding social liability in France, which was mostly offset in H2 2022.

Our certification business maintained a high margin at 18.3%. And overall, we have managed to keep the margin at 15% in the first half despite ForEx headwinds. Moving now to other financial metrics in the first half, EPS, cash and balance sheet related items. Starting first with the bottom line elements. Our net financial expense decreased by nearly half compared to last year, to €15.2 million in the first semester.

This is mainly attributable to the increase of our financial income. Bureau Veritas has a well-established policy of cash centralization, which allows to take advantage of the opportunity of higher interest rates.

On the income tax front, our adjusted effective tax rate was reduced by 0.6 percentage points compared to the first half of 2022 to 30.7%, decrease is due to the reduction in dividend distributions from countries subject to weathering tax during the period. On the next slide, you see the growth in EPS. Here, we delivered a strong adjusted EPS of €0.61, up 11.1% year-on-year.

This reflects, of course, solid operating performance, but also lower financial tax charges and financial charges. We are now 30% ahead of the 2019 levels and we are confident to maintain a positive EPS momentum moving forward. Moving to the cash flow statement. Free cash continues to be very strong and is up 1.5% year-on-year to €131.9 million. Given the strong revenue performance in the second quarter, working capital requirement outflow was kept under control at €196 million compared to €176 million outflow the previous year.

I consider the working capital at 8.8% of revenue a good achievement given the strong level of activity at the end of H1, and we are expecting the usual seasonality when it comes to H2 working capital reduction. On the investment front, CapEx increased to 2.6% of revenue to fund growth development in our lab-related businesses after the relatively low levels of 1.9% in 2022. We expect this to be circa 2.5% for the full year 2022. As a conclusion, we closed H1 with a very stable and robust financial structure. The group adjusted net financial debt went below €1 billion at the end of June.

Our leverage ratio was largely unchanged compared to the end of 2022. As a reminder, we have no major refinancing before '25, and 100% of our debt is at fixed interest rates. Regarding the €500 million Eurobond due in September, €200 million is already refinanced and €300 million will be reimbursed for the use of cash. To sum up, another strong financial performance, and I would like to thank all the teams across BV for their strong commitment in achieving these results quarter after quarter.

And now I hand back to Hinda for the business review.

[Hinda Gharbi, Deputy CEO]

Thank you, François.

So let me share with you the first half highlights for our businesses. For Marine & Offshore, we delivered a very strong 15.6% organic revenue growth driven by both in-service and new construction activities growing double digit. This performance was led by the overall increase in the fleet, a high number of occasional surveys and solid pricing. We expect the favorable momentum to continue in the second half with the lower organic growth.

This is owing to exceptional half to 2022 performance from survey catch-ups and one-off regulatory campaigns in Q4 last year. Services grew double digit also, thanks to a strong momentum for consulting services related to energy efficiency.

On the sales front, our new orders totaled 4.3 million gross tons, bringing our order book to 20.4 million gross tons, providing a solid outlook for future growth. M&O performance is supported by robust trends going forward and is on a structural growth path. So let me show you and give you more color on that.

You see clearly on the chart that the business has delivered a steady organic growth over the past several quarters with an upward trend over the last three years. This is driven by two long-term structural trends in the shipping industry. First, the average age of the world fleet is currently estimated at about 15 years, driving an acceleration in ship renewals.

The second and most important trend is linked to the more stringent decarbonization regulations time line and targets. This is triggering the development of alternative fuel ships, which already accounts for half of new ship orders worldwide in tonnage from recent research.

This includes also LNG fueled ships where we have developed a leading position. In this context, the Marine sector has a positive long-term build cycle. Indeed, shipyards are currently operating at full capacity and ship owners must need that decarbonization targets, creating opportunities for the backlog to build that. Moving now to Agri-Food and Commodities, where we delivered a 6.5% organic growth in the first half. The Oil & Petrochemicals segment posted mid-single-digit organic growth, thanks to higher testing volumes and price increase benefit.

We continued our diversification into nontrade-related activities gaining momentum in biofuels and oil condition monitoring. Our Metals & Minerals business grew low single digits overall. It benefited from a strong trade activity and the success of our group on-site laboratory strategy for the upstream business.

We continue to see high demand for copper and base metals, led by electrification in many factors. Our Agri-Food business recorded high single-digit organic growth was fueled primarily by agricultural products and food testing in new geographies such as the Middle East and the U.S.

We are also benefiting from a favorable regulatory environment for traceability services in Europe. Lastly, Government Services achieved high single-digit organic growth, led by the ramp-up of several verification of conformity contracts in Africa, the Middle East and Central Asia. Turning now to Industry. This business recorded one of the highest organic growth levels in our portfolio at 15.5%. Energy transition continues to accelerate over the period and is triggering an increase in clean energy investments and the rollout of decarbonization solutions.

By subsegment, Power & Utilities is a key driver of growth with a double-digit organic performance in both OpEx and CapEx activities. This included a solid momentum in the group OpEx business in Latin America and projects related to nuclear power generation in Europe, both in new build and decommissioning.

In renewables, we grew high double digits organically with opportunities mainly in wind, battery, energy storage and carbon capture projects. In Oil & Gas, the performance was strong overall with OpEx, benefiting from a strong sales pipeline conversion. CapEx growth on the other hand, stems from the start-up new projects, specifically on the gas side.

For Buildings & Infrastructure now. In H1, we delivered 10.8% organic revenue growth led by strong performance across most geographies. From a mix perspective, both construction-related activities and in-service activities grew double digits. This performance highlights our balanced and resilient B&I growth platform. Asia Pacific was one of the best-performing regions, delivering a double-digit organic revenue increase in H1 and in Q2 driven by strong performance in India.

The Chinese activity is steadily improving. In the Middle East, we continued our expansion with numerous projects in the region, including Saudi Arabia. Europe delivered strong growth as well with France maintaining a solid momentum led by its in-service activity and energy efficiency programs. Moving to the Certification business. We delivered a strong organic growth at 11.2% in the first half of 2023.

Our growth was supported by both volumes and robust price increases across most geographies and states. This good performance was enhanced by the acceleration of the diversification of our portfolio in cybersecurity and new certification schemes.

This generated half of the H1 organic growth performance. Sustainability-driven solutions continued to perform strongly, up 17.3%. The drive for more brand protection, data transparency and structure responsibility commitments all along the supply chain continues to valid pace.

This growth was driven by high demand for verification of carbon emissions, supply chain audits and assurance of sustainability reporting. For Consumer Products. The resilience of our business in China, in H1 last year now represents tougher comparables.

For Softlines, we experienced a different experience, a different set of dynamics in the various countries as expected the slower activity in China was mitigated by South Asian countries benefiting from the continuing structural shift outside China. Technology-wise, the business is still affected by the slowdown in new product launches and information communication technologies and wireless.

On a positive note, we grew double digits organically in the new mobility subsegment. We continued our growth momentum for inspection and audit services with strong growth in sustainability services. This includes organic sourcing, recycling, social audits and green claim verifications.

In the next slide, you will see how we are evolving our consumer product services strategy. In consumer products, we are steadily strengthening our resilience and developing our footprint through acquisitions and sustained investments.

Last year, we acquired three companies representing €44 million in annualized revenue. And this year, we increased our CapEx to support customers' expansions in new geographies. We are developing this business by accelerating our diversification in three ways, by sector, by service and by geography. First, we have expanded in health, beauty and households. This now represents 8% of divisional revenue and has excellent growth potential.

In H1, it generated double-digit organic growth with Asia and the U.S. leading the way. The integration of Advanced Testing Laboratory and Galbraith Laboratories, both acquired last year in the U.S., progressed well with a growing sales pipeline. Secondly, we are expanding our expertise and solutions in sustainability and CSR-related services. As an example, the acquisition of AMSfashion has enabled us to support European retailers and brands looking to improve their supply chain reliability and resilience.

Thirdly, many manufacturers are evolved in the Asian footprint to derisk China. This structural change in the supply chain is providing opportunities in many other Asian countries. Recently, we have invested in a new technology testing lab in Southeast Asia.

On the European side, the retailers have been relocating closer to end markets, creating opportunity in nearshoring zones such as Turkey and Morocco. Now I would like to talk to you about our sustainability services innovation in the first half.

As we have mentioned many times, sustainability and energy transitions are important drivers of our group's growth potential. The BV Green Line of solutions and services is a good proxy for our developments in these fields, which represents today, 55% of the last 12 months sales. Continuing the trend from last year, our sustainability solutions are in high demand. We continue to expand and innovate to address new needs. A few examples in H1.

First, in response to the newly introduced German Supply Chain Act, we developed a risk assessment methodology built around our Clarity solution to address customer needs. This will also allow us to roll out rapidly in other countries when other regulators put in place similar requirements.

The second example relates to our ship financing model that addresses the maritime sector decarbonization goals. We developed this tool to help the group of banks, assess their investment risks and build their own strategies aligned with the presiding principles. Finally, in Q1, we introduced an audit framework for the climate neutral data center pack.

I'm pleased to report that we have signed contracts with three major data center companies based in Denmark in order to assess and verify that compliance in terms of sustainability and efficiency. Moving now to the outlook. Based on the first half performance and a healthy sales pipeline, we now expect for the full year 2023 to deliver mid- to high single-digit organic revenue growth, this is to compare to mid-single digits previously. A stable adjusted operating margin at constant currency and a strong cash flow with a cash conversion of above 90%. Before taking your questions with François, I would like to close by saying that I am more than honored to take over as CEO of this great company.

I believe Bureau Veritas has a highly robust portfolio of businesses, a global footprint and a great team of people and experts around the world. These trends are demonstrated by the first half results that also enabled us to raise our full year organic growth outlook. We're leading in so many fields, particularly with innovative solutions that ensure our customers can make their own challenges proactively.

Looking further ahead, the TIC market has a very promising future. Bureau Veritas will continue to create value by investing and taking advantage of the growth opportunities that are key to building the next chapter for the group.

Thank you all very much for your attention. François and I are now ready to take your questions on the call or on the webcast.

[Operator]

Thank you [Operator Instructions] We will now take our first question from Suhasini Varanasi from Goldman Sachs. Please go ahead. Your line is open.

[Suhasini Varanasi, Goldman Sachs]

Hi, good afternoon. Thank you for taking my questions.

[Hinda Gharbi, Deputy CEO]

Hi.

[Suhasini Varanasi, Goldman Sachs]

Hi, there. Can you please talk about how much price contributed to growth, organic growth in the first half? That's my first one. And second, your outlook on margins is now stable at constant FX rates. I think earlier it was stable year-over-year. Can you please talk about what the FX impact was the drag that you expect on a full year basis at current rates? And the third one actually is on Certification division. Margins have fallen 60 basis points roughly on an organic basis. Can you help us understand why there was the weakness in 1H and your expectations for second half? Thank you.

[Hinda Gharbi, Deputy CEO]

Thank you, Suhasini. I'll let François answer. Go ahead.

[FrançoisChabas]

Hello Suhasini. So taking by you've three questions in the reverse order. Margin for certification I would say we put a bit more investment in terms of sales force in this segment that we believe is very promising. Hinda has mentioned the cybersecurity schemes. So great development here. Overall, we don't expect a margin erosion for the full year. So no worry on the 12-month basis. Second, the outlook margin, well, as you know, we report in euros.

And since this year, euro is fairly strong, our H1 numbers have been eroded margin-wise, around 20, 21 basis points in terms of margin. If I could predict the FX, I would not be sitting in this chair to answer your question. It will be somewhere in the Paradise Islands. It's not the case, so the best I can tell you when we run the models and which they have for banks, I think as most companies are doing.

And what we can see today is - on a full year basis, the origin would be between 20 to 30 basis points at current spot rates. So, when we factor into it in H2 where we had the U.S. dollar, in particular, would be very weak. So 20 to 30 basis points on a full year basis. And finally, the price component, we are careful about what we serve on prices for obvious reason, commercial reasons in particular.

I think the growth we enjoyed in H1, as mentioned by Hinda, has been first and foremost driven by volume. We want to remain very competitive, very active in the market in which we operate. I would reiterate what we said at the beginning of the year, we have reported in 2022, a price component in the growth of 2% in the P&L on a 12-month basis. We confirm that will be better this year in terms of price components. It is not for us a goal per se.

What matters is that what we see in the H1 numbers, we have been capable to deal with inflationary pressures. The best proof of it is that the margin is basically the same compared to last year. And we reiterate the fact that on a full year basis, at constant currency, the margin will remain the one we have enjoyed last year. So pricing is doing great do not worry, but the bulk of the growth is coming from volume, and we're happy about it.

[Suhasini Varanasi, Goldman Sachs]

Very clear. Thank you so much.

[Hinda Gharbi, Deputy CEO]

Thank you, Suhasini.

[Operator]

Thank you. We'll move on to Annelies Vermeulen from Morgan Stanley. Please go ahead. Your line is open.

[Annelies Vermeulen, Morgan Stanley]

Hi, good afternoon. I have two questions, please. So firstly, on Consumer, it sort of divisionally, the weakest growth within Consumer Products and also by geography weakest was in Asia. But given that you talked about Building & Infrastructure growing double-digit in Asia, can we therefore - that Consumer in Asia, and I'm guessing China remains particularly weak. I think previously, you talked about the benefits from reopening in the second quarter. Is it fair to say that this perhaps hasn't been as strong as you expected?

And then secondly, on Marine & Offshore. So clearly, the growth was very good in Q1, but has accelerated further in the second quarter. I think in Q1, you were still benefiting from some regulatory tailwinds rollover from last year. But given some of the structural trends that you've called out in that division, do we need to think about a rebasing of growth in this division going forward, i.e., that it will sort of be structurally higher for longer? Or are there still some sort of short-term benefits that will roll off? Thank you.

[Hinda Gharbi, Deputy CEO]

Thank you, Annelies, I think that's three questions there. I come back to you on the second one. So let's start with CPS. I think - as we've said, we're expecting CPS to have a challenging H1. Thinking about the fact that last year - H1 last year, we actually had a very resilient performance, so the comparables are not particularly helpful when you look at H1 this year. What is very clear to us now, Annelies, is that we need to accelerate the diversification of our CPS business.

And as I mentioned in my prepared remarks, we're looking at it by sector, by service, by geography. We have made acquisitions last year. It is absolutely no secret that we're looking to continue to accelerate our M&A in this space. We also increased our investment. So, we're very clear that we need to make sure that we evolve our footprint and our offerings so we can actually ensure a stronger growth.

So what we see is Q2 this year will probably hit the bottom and we expect that the second half of the year for CPS to be more favorable because again, the comparables at this time favorable in H2, so we expect that. And we, of course, going forward, our diversification strategy should pay off. So that's CPS. I believe you asked the second question on B&I - specifically B&I channel, is that correct?

[Annelies Vermeulen, Morgan Stanley]

To do with Consumer, yes, around the more - because you - I think you called out double-digit B&I growth in Asia. So given your mix and your exposure in Asia, just around the comments on Consumer and particularly in China, what you can comment on that? And then the last question was on Marine & Offshore?

[Hinda Gharbi, Deputy CEO]

Yes. So let me take it off on M&O. So look, we had an excellent, excellent performance of M&O. And as we said in Q1, we have seen - there are two ways to think of the M&O performance. I think the fundamentals of the sector are very strong. It's very clear. There is a renewal of shifts and that is decarbonization targets that are basically going to push ship owners to upgrade their fleet and improve and really commit to these targets and have a plan to do it.

So from a build perspective, we consider that these are really good trends for a resilience build cycle for the sector. So, if you look at our order book, then we have a very good baseline of growth in term of conversion of that order book backlog into growth. So that is a fact. What we have seen that was a bit more exceptional were some of the catch-ups that we have seen late last year and some regulatory inspections.

And if you recall, it was the Water Ballast inspections that were done, that really boosted the revenue last year. So, what we see is we have seen continued exceptional service as people really caught up with all the delays they had throughout COVID. We won't see as much in H2. And the other thing is the comparables in H2 are going to be tougher because of the pickup we have seen in H2 last year.

So structurally, I think we have a solid growth. To upgrade it to a much higher growth, I think that won't be the case, certainly not in H2. What I can say is that we are positioning ourselves on segments of the market that should grow, namely dual propulsion systems, LNG fueled ships. So we are preparing ourselves to benefit from that growth in the market. I'll let François answer on the B&I.

[FrançoisChabas]

Yes, I think your question on B&I or the reference was trying and compare, draw a comparison between the trend of B&I and the one of CPS in China, the situation in the building infrastructure in China is vastly different. The activity is where we started. I say we have here easier comps because Q2 last year was, of course, on a full of downfall for costs side.

So overall, it's a double-digit growth on H1 for B&I China. And I think all the projects are active at the moment have reopened - have restarted the pipeline of sales is very strong. So, I would say we are quite optimistic for the second half in our building infrastructure activity in China.

[Annelies Vermeulen, Morgan Stanley]

Okay. Thank you very much.

[Hinda Gharbi, Deputy CEO]

Thank you.

[Operator]

Thank you. We'll move on to our next participant, Neil Tyler from Redburn. Please go ahead. Your line is open.

[Neil Tyler, Redburn]

Yes. Good afternoon. Thank you. Three for me, please. Firstly, the restructuring and impairment costs that you've booked, I wonder if you could - could you provide a little bit more detail on the background to and progress on what specific initiatives? I think you mentioned some of the initiatives that are taking place within CPS, but how much more is to come and any specifics on the asset impairments that you've booked and how comfortable you are with the - with what's on the balance sheet remaining? Secondly, sticking with CPS and the comment you just made in response to Annelies question. It sounds like you think the answer to the challenges there is sort of accelerating restructuring, but also investment?

And how confident are you that the returns on some of the M&A and organic investment that you need to make will be acceptable over the sort of medium to long term? And then final question, specifically, you've - you mentioned in the statement, I'm quite interested in the sort of opportunities that are arising from the Olympics that will take place in France in 2024. I suspect you're quite well positioned across a number of your activities to benefit from those, whether you've had any opportunity to frame that in terms of revenue or profit opportunity across the group and the longevity of that opportunity, please?

[Hinda Gharbi, Deputy CEO]

Okay. So thank you, Neil, for that. I'll let François to answer on the restructuring. Go ahead.

[François Chabas, CFO]

Yes, Neil, on the restructuring, so it's pretty straightforward. We've done most of it. There will be very little left for us to a couple of millions, not more. I think I've mentioned, we're looking at the profitability by sector. It's no mystery that when you are running a lab business, if your top line goes down, you know as good as me that's it forestries downwards.

And I think our teams within the Consumer Product division have acted very rapidly. So that's the margin overall was, frankly, very well protected. We've closed H1 at more than 20%. So we've rationalized and coming to your sub questions, we've rationalized a couple of labs to concentrate the revenue on those, mainly in Asia and Europe. And this is part of the diversification that Hinda was mentioning.

On the one hand, we invest into new labs in better locations. We invest through M&A. On the other hand, some legacy labs, which for whatever reason have lost the volume they used to enjoy at some places have been closed.

So it's a rapid turnaround, frankly speaking, and it's been done very diligently by the team a bit in Q4 last year and a bit - a little bit as well in - so in H1 this year as you see. When it comes to the payback on those - the CPS rate investment, I think we are very pleased, as Hinda mentioned, that's the acquisition we've done last year will contribute to the organic growth starting H2.

And with - I would say the three acquisitions we've made last year, two in the U.S. and one in Europe are actually delivering more than on plan. So it's been a real pleasure to see this unfolding. And when it comes to payback, frankly, no question here that the price we pay was correct and the payback as per standard.

[Hinda Gharbi, Deputy CEO]

Yes. Thanks, François. I think the only thing I would add to that is, at the end, we are very - we will consider investments in a very disciplined way. If you look at the diversification in the HVA space, as I mentioned, that's a vast market is growing well. It's very resilient. It's also a move into the upstream side, if you like, of the testing, the analytical testing, that's an area we're interested in.

So we're very clear on the strategic fit on the return and the ability for us to re-execute this M&A. And then on the investment side, I think it's very important, especially on the tech side, to be aligned with the evolution of technologies of the opportunities. What we see today, the ability is growing double digits for us. It's an area of interest.

We see a lot of energy-related consumer products are also an area we're looking at. So there are a number of new segments that are linked to a big energy transition technology evolution that are actually important. So I'm not worried on the returns like François was saying. On the final point, on Olympic games, this is already included into our financials. We don't break it down.

What's important to think about for Olympics games, of course, we're very fortunate to be here in Paris, there's a lot of investment by the French government and the city here to refurbish stadiums and facilities and buildings and any of the sports and leisure facilities. And of course, there is a real renewal around accommodations here in Paris and elsewhere where games will take place. So we are obviously very opportunistic and following up on this.

[Neil Tyler, Redburn]

Thank you. That's very helpful.

[Hinda Gharbi, Deputy CEO]

Thank you.

[Operator]

Thank you. We will move on with our next participant Harry Martin from Bernstein. Please go ahead. Your line is open.

[Harry Martin, Bernstein]

Thank you very much. Good afternoon, everyone. The first question, I don't think you've mentioned, but I wondered if you could give any sort of outlook for the oil and gas renewables related businesses and for the second half - are there any signs of softness or tougher comps in that segment, particularly.

The second one is on CapEx. I think it's quite interesting. CapEx for sales came up 2.6% in the first half. And you've mentioned that in order to finance growth in the lab activities going against many years of reductions in CapEx to sales, as you've grown less capital intensive areas. So I wondered if the increase is maybe a suggestion that the reduction down - all the way down to below 2% of sales is a little bit too far and where you expect that capital intensity to reach in the medium term?

And then final question, just on the balance sheet. I mean, we're already at sub-1x leverage, once run over 2x free cash flow forecast into this, it's clear that there's quite a bit of cash to deploy over time. So Hinda, I wonder if you can just outline your approach to capital allocation - your M&A in the future, shareholder returns and what we can expect to see at later time.

[Hinda Gharbi, Deputy CEO]

Let me start with the oil and gas. So - and François will answer on the CapEx. So first of all, all my connections in the oil and gas sector and everything I read tells me that the international business for oil and gas is super, super strong. There's a real strong cycle going on. In particular, we have seen that the gas projects have really taken off and we've been very focused on those because this is complex work and a scenario where we are particularly good at.

So frankly, as I look forward, I don't see any signs of slowdown. You will hear headlines about North America versus international, but considering our footprint, that is not really of a great impact to us. So very positive about the oil and gas activity. But we remain very disciplined, though, on that. We are mostly focused on OpEx, and we're very selective on CapEx work and we make sure that we are really going for accretive work that we are able to execute.

On the renewable side, look, I really think the outlook is quite positive for the first time now for every dollar spend in fossil fuels, $1.7 is on renewables. So we are seeing the real takeoff in term of projects. We have seen recently that our Bradley construction, which is an expert in wind farms has really taken off in the U.S.

We have a number of projects around the world. We just secured the project in Saudi Arabia for some renewable as well. So this area is very buoyant, very busy, and we are well positioned for that. So both for the energy sides, for me, in the near term is quite solid. I'll let François on CapEx.

[François Chabas, CFO]

Harry, so on CapEx, by nature, we remain an asset-light business, even looking at the H1 numbers, if you take the industry segment, grow more than 50%. The B&I segment, grow more than 10%. Certification, more than 10%. M&O, more than 15%. None of these segments consume more than 0.8% of the remained CapEx.

So CapEx to us is necessary in the lab businesses and only in those ones. I would say what - we took some opportunities, I would say, back in the year '19, '20 is where the cost of money was very low to go on some lease for some machines and equipment that kind of majorly a little bit reduced on CapEx standard by as per cutting standards. But I would say you should expect on a yearly basis 2.5 as being a pretty reasonable and normal level. There will be some acceleration indeed in consumer products. I think we are doing well in the Metals & Minerals and O&P business.

So by a sense, we do remain an asset-light business. And just the portfolio we have will never get us to a 5%, 6% or 7%, that's not possible. And that's not what we want to do. So we are following our clients as best as we can.

I think you had a third question on capital allocation, correct? So on capital allocation - so few changes compared to past years. As you may have seen, when it comes to return to the shareholder, we've updated our dividend policy to distribute now, and you've seen the results in July. 65% of our net - adjusted net results. So we've saved this policy to be able to last, not just being a one-off.

So it's been calibrated. That's point a. Point b, when it comes to capital allocation, as I mentioned, CapEx, we can come from 2.5% of the revenue by enlarge. M&A, we have what is necessary to move. Good pipelines will remain disciplined here.

And last but not least, when it comes to the leverage, we don't have intrinsically a leverage objective. One-ish is good for us. It will be a function of the M&A opportunity we can find and here anywhere below one and two, I think the most important is that I can sleep well at night. And I think very well below two.

[Hinda Gharbi, Deputy CEO]

So maybe to add on to that, Harry, to answer for your question is, we are - we have made no secret in recent discussions with investors and yourselves that we want to accelerate M&A. We have, as François pointed out, we have a healthy balance sheet, and we have room to do things.

We want to remain disciplined in a sense that we want to make sure that the attributes of the targets we're looking after - we're looking at are actually in line with what we want. We're really looking to accelerate in markets of leadership for us. We have said that we want to expand in North America, and we continue to be a market for us, both on the B&I and Industry side of things.

We have said that we want to grow in high-growth space renewable comes to mind. Cyber is another, sustainability as well. So we have very, very clear plans that I just mentioned earlier, CPS. So we are - while we didn't have specific acquisitions in H1, we are working on the pipeline. We're looking at targets and we're assessing them and in due time, we will materialize them.

[Harry Martin, Bernstein]

Thank you.

[Hinda Gharbi, Deputy CEO]

Thank you.

[Operator]

Thank you. We'll move on to our next participant, James Rose from Barclays. Please go ahead. Your line is open.

[James Rosenthal, Barclays]

Hi. Thanks very much. I've got two, please. The first, it's been flagged on previous calls that you were saying, and you had a very strong sales pipeline, which is visible in the results today. How is this pipeline looking now? Has it been replenished? And can we still expect good volume growth to continue?

And then secondly, on margins, slightly down at constant currency despite 9% organic growth. Is there anything beyond the consumer business to flag, which has held the group back? And when we think about the second half, if consumer comes back slightly, is there a reason to think the drop-through should be incrementally stronger in the second half?

[Hinda Gharbi, Deputy CEO]

So on the sales front, we actually - we are very focused on growing the pipeline of our business. There is - we have good tools today with we installed sales for few years ago. We have a real take-up. It's becoming a tool now for our sales effort. We are focusing also on high demand services where we have programs specifically to follow on that.

So all hand is on deck, if you like, when it comes to the sales pipeline. I'm quite pleased with where this the pipeline sits today. Our sales are at budget or both depending on the businesses. So we are doing well on the sales front. I'm not really particularly concerned. But of course, we have to make sure that we are very sharp in these strategic markets. I'll let François to go over the margins.

[François Chabas, CFO]

So on the margins, you flagged the two - the one issue you flagged is correct. We have, of course, a softer margin in CPS at 20 - a bit more than 20%, but lower than usual. The second element is what has been mentioned on B&I where we had a positive one-off in H1 last year that has phased out over H2. So on a full year basis, this is not full, but H1 last year was positively impacted. So now moving to H2.

If you factor those two things, will be easier on the B&I front, for sure. On Industry, which is to me the best news of H1 because the industry is a large chunkable business. We should continue to see an increased profitability. And we've been talking now for, I think, three quarters about the efforts taken by our operational leadership to be slightly more selective in the industry segment, which is related to renewable, which related to power entity to OpEx businesses. And I think we've reached the balance which is frankly not bad in being able to grow fast, but at the same time to bring the margin up.

So we expect this to continue in H2. And so overall, I'm not too worried for the second half when it comes to margin. That's why we've reiterated our guidance to keep the margin stable compared to last year at constant currency. We'll see later on during the year how it evolves, but we are usually prudent in our guidance moving forward.

[James Rosenthal, Barclays]

Thanks very much.

[Hinda Gharbi, Deputy CEO]

Thank you, James.

[François Chabas, CFO]

You're welcome, James.

[Operator]

Thank you. We will move on to our next participant, Simon LeChipre from Stifel. Please go ahead. Your line is open.

[Simon LeChipre, Stifel]

Yes. Good afternoon. Two on my side, please. First of all, on B&I in North America, could you comment a bit on the backdrop here? I think the trend slow down a bit. So what are the drivers behind this? And how should we view the outlook?

And secondly, I mean, looking at your medium-term targets set at the CMD. So on topline, you do much better than mid-single digit, but on margins. So your target was to be above 15%. So you should be at 16% at constant currency this year. So my question would be should we still expect margin to improve going forward? Or should we rather focus on the absolute AOP and the pace of growth given your focus on growing the topline and with the mix, which is not really helpful for you?

[Hinda Gharbi, Deputy CEO]

On the B&I side, so the B&I platform has been designed and all our acquisitions and efforts and investments were made to ensure we have a resilient platform there. So we build this mix of businesses with exposure to CapEx, very good exposure to OpEx as well. And really, it's doing its job as we expect it to do. So our growth, I consider it resilient this year. The comparables were like they were some businesses that were projects that finished at some point.

You have some cycle there, a small one, but reality is I'm quite actually pleased with the resilience of the business. The interest rate haven't had which we were watching very closely. Haven't had really a negative impact. We've seen delayed decisions, particularly on the transactional side of the business, which tends to be around real estate transactions and some of the inspection work we do there. But in general, the rest of the business has held actually quite well.

And I expect that as things start stabilizing in terms of interest rates in the states that even that part will recover in due time. So in general, it played it's role. We continue to watch that market. We consider it a prime or a premium market for us B&I and we'll continue to invest there. And the other thing, which I need to mention is in the U.S.

is the if you like, the new IRA, the inflation reduction app is preparing the ground for real momentum of growth in this space. It's going to take a bit of time. We're not going to see the impact immediately this year. But probably in the next 18 months to two years as projects start, there will be an element of infrastructure attached to it that would be actually quite beneficial for us. So that's on the B&I side of things. I think on the margin side, I'll let - you want to take that, François?

[François Chabas, CFO]

Yes. Sure. So first, when comparing the current performance with the one of - so the plan that has been shared at the end of 2021, you're right, we are really looking faster on the topline front and we delivered a 16% growth we've promised upon. I think this plan was set up on two elements. It's not a three year plan that says in three years, this is what we're going to achieve.

It's a plan that's say, each and every year. We will at least achieve 5% and 16%. So happy in the topline, bottom line has been delivered. At the end of the day, I'm always sometimes surprised on this call, there is so little to ask about the - what at the end of the day, the value creation for the company, which is the adjusted EPS. And I think more and more, this company, what drives our decisions is that the ultimate impact on the EPS.

And we try step-by-step quarter to quarter to build a trajectory on the growth front, maintain the trajectory on the margin front and start to build a trajectory, and I recognize it's early in the story of recent history of Bureau Veritas. We are - since 2019, step-by-step, starting to build a story on the EPS front. So it's early days. I think there is still a lot to do. H1 results are in the right direction with - but I think we'll talk more and more about the bottom line EPS contribution, which we believe is what matters for shareholders.

[Simon LeChipre, Stifel]

Thank you.

[Hinda Gharbi, Deputy CEO]

Thanks Simon.

[François Chabas, CFO]

You're welcome.

[Operator]

Thank you. We will move on with our next participant, Arthur Truslove from Citi. Please go ahead. Your line is open.

[Arthur Truslove, Citi]

Good afternoon. Thank you very much for taking my questions. Sorry if I missed the answer to this one, but just if I look at the restructuring and the impairment again, I remember in 2022, the majority - a lot of that related to consumer products in China. I wasn't sure from your previous answer whether that was the case, once again, in the first half of this year. And I just wondered if you could confirm whether or not that was the case. The second question I had related to depreciation and amortization. So if I strip out the acquisition, amortization and the impairments, it looks like underlying D&A is around €10 million below the previous year in the first half.

And I just wondered if you could provide some details as to how that came about. And then I guess my final question, really. Clearly, your industry division did very, very well. I mean it seems to have materially outperformed your major competitor that reported the other day. And I just wondered if you could sort of talk about what you're doing right there that's enabling you to outperform your competitors.

[François Chabas, CFO]

Yes. Sure. So on the restructuring, just to be very precise, you're right. Good chunk was done in '22 was China, a little bit of 2023 was China again and the rationalization of our European footprint. And that's kind of close to all restructuring we have to do on CPS, as I mentioned, most of it is done now delivered.

So China - most of China in 2022, 2023 China/Europe. That's A; B, on depreciation and amortization, I'm keen to see you are the precise readers of our financial statements. And I don't want to defer you from the right level of information I recommend you can talk to Investor Relations team that will give you more details about it so that you can refine your model. When it comes to the margin of industry...

[Hinda Gharbi, Deputy CEO]

I will - it's more about the business, I guess, not only the margin, I'm assuming the Arthur. Did you want to clarify? You were asking in general about the business?

[Arthur Truslove, Citi]

Yes, it was more about exactly. Yes. I mean you've outperformed from an organic growth perspective. And yes, just so it's gone very well. So I just wonder what you were doing better than your competition.

[Hinda Gharbi, Deputy CEO]

Yes, no worries. Thank you. So look, I think it's good to understand really what's our position in the industry space. We've always been a strong player, an expert player in the energy system and starting with oil and gas, and it's an area, even if we pivoted from it and we diversified in the company, we retained a lot of the expertise and that expertise we further augmented now with expertise in the renewables space, and we are not going into just one space. We're looking at wind, at solar, we're looking now at hydrogen.

We're looking at auxiliary systems, energy storage systems. So we're really expanding we're investing into the capabilities for the industry. And really, we're making sure that we're leveraging also our global footprint specifically to a company if you like the build cycle that is going on right now. So you have the build cycle on the low-carbon energy system, and that includes also nuclear, and we have capabilities in all these. So we have excellent expertise.

We have a global footprint, and we have a brand recognition across all the players in this sector. And where we don't have that brand recognition or a footprint, we have made acquisitions. We bought Bradley, as I mentioned in the U.S., and we continued to scout the markets to find other capabilities that we need. And for us, this industry space is in many ways, our legitimate playgrounds and it's something we want to develop. So I'm quite pleased with the performance of course, and we're seeing double-digit growth on the renewable side, specifically, we'll continue with that.

And of course, the other thing which is important is our history around M&O capabilities, our Marine & Offshore capabilities in terms of floating capabilities, and we are seeing now growth in floating wind farm. That's an additional differentiation that some others maybe don't have. So we're very committed to the space, and we'll continue to invest in it.

[Arthur Truslove, Citi]

Great. Thank you very much.

[Hinda Gharbi, Deputy CEO]

I think we are looking at - yes, go ahead please, Priscilla.

[Operator]

All right. We'll move on with Karl Green from RBC. Please go ahead. Your line is open.

[Karl Green, RBC]

Yes. Thanks very much. Just two remaining questions for me, please. First one for François quite straightforwardly. Obviously, interest income in the first half was up materially on the back of rising interest rates. Just thinking about the second half, given that you should see the seasonal working capital inflow, a good cash generation and arguably an annualization of higher interest rates. What sort of interest income number are you looking at budgeting for the second half?

That's the first question. The second question, sort of more broadly for the team. Just on M&A, I mean, clearly, you said you would like to accelerate work and activity there. I mean how confident are you that you can actually do that on a 12- to 18-month view versus, say, six months ago? I think one of your bigger competitors seems to be quite confident they can actually get the execution through more clearly over the next 12 to 18 months. So just any further color you can add there.

[Hinda Gharbi, Deputy CEO]

Yes, I'll take the second question, and then I'll let François address the interest rates. Look, our intentions are very clear and the work we're doing are also very clear. We would like to accelerate. We have the capability - financial capabilities for it, and we know what markets we want to go after. It's a matter then now of really assessing the opportunities we find, of the targets we find and making sure that we can actually find a path to secure them.

So we're hard at work, if you like, Karl, on that. And our intention is to try to accelerate and within a timeframe that makes sense in the near term. This is not a very, very long term in the near term, we would like to do that. So I can't really tell you more than that, and we'll have to show you in the future. Thanks.

[François Chabas, CFO]

So coming back to your point, I think you're making a wise assumptions about the usual inputs of cash coming or seasonally over H2 mainly. You should not, however, underestimate the fact that we pay dividends in July, and these dividends were actually 45% higher than the year before. So we are very pleased about it, and I'm sure shareholders are. So we have a little bit of - it's a dual equation to manage a bit less central cash, high interest rates. However, this being said, we have really a narrowing type discipline in this company when it comes to cash centralization.

And believe me, when you operate in 140 countries, you better have it. So we are very, very proud of being able to really centralize each and every euro and make the best use of it. So what we see today in terms of net financial costs, if the high rate environment stays around us and if we don't have major M&A coming in, the net financial costs have - current scope stay without transformational M&A whatsoever should be around €60-ish million on a full year basis, which allows us to get a bit of a kick in the EPS.

[Karl Green, RBC]

Great. Thanks for the clarification.

[François Chabas, CFO]

You're welcome.

[Hinda Gharbi, Deputy CEO]

Thank you, Karl.

[Operator]

Thank you. And we will have our last question from Geoffroy Michalet from ODDO. Please go ahead. Your line is open.

[Geoffroy Michalet, ODDO]

Hello. Thank you for taking the question. Just one for me. I was wondering in the Industry division, if it is fair to assume that the pricing component is probably superior to other division given the scarcity of resources, i.e., the people - the qualified people in the sector, meaning that going forward, the more contract you - the more demand that will be the more pricing power will the company have for those who have the people.

[Hinda Gharbi, Deputy CEO]

Yes. I don't know that I will compare it to other divisions. I think what's important here is having the capabilities at the right place and at the right time is definitely a very good competitive position to be in. And that's why we're very busy augmenting the capabilities in our technical centers around the world. So thus that give us some price advantage, absolutely. And that's what we want to bank on. But at the same time, it's a busy space, and there is a lot of interest from others, of course. So our ability to find the right targets to expand in the right markets is going to be very important.

[Geoffroy Michalet, ODDO]

Okay. Thank you.

[Hinda Gharbi, Deputy CEO]

Thank you.

[Operator]

Yes, speakers it appears there is no further questions. Please go ahead with your additional or closing remarks.

[Hinda Gharbi, Deputy CEO]

Yes. Thank you very much. Thank you, everyone, for your questions. Thanks Priscilla.

[Operator]

Thank you, everyone. You may now disconnect. Have a great day.